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SEPA, Efficiency, and Payment Card Competition

  • Wilko Bolt
  • Heiko Schmiedel

This paper analyzes the welfare implications of creating a Single Euro Payments Area. We study the effects of increased network compatibility and payment scale economies on consumer and merchant card fees and its impact on card usage. In particular, we model competition among debit cards and between debit and credit cards. We show that competitive pressures dampen merchant fees and increase total card acceptance. The paper argues that there is room for multilateral interchange fee arrangements to achieve optimal consumer and merchant fees, taking safety, income uncertainty, default risk, merchant's pricing power, and the avoided cost of cash at the retailers side into account. Consumers and merchants are likely to benefit the most from the creation of SEPA when sufficient payment card competition alleviates potential monopolistic tendencies. Key Words: SEPA, card network competition, optimal pricing, economic welfare

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Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 239.

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Date of creation: Jan 2010
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Handle: RePEc:dnb:dnbwpp:239
Contact details of provider: Postal: Postbus 98, 1000 AB Amsterdam
Web page: http://www.dnb.nl/en/

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  1. Mark Armstrong, 2005. "Competition in Two-Sided Markets," Industrial Organization 0505009, EconWPA.
  2. Bedre-Defolie, Özlem & Calvano, Emilio, 2009. "Pricing payment cards," Working Paper Series 1139, European Central Bank.
  3. Wilko Bolt & Sujit Chakravorti, 2008. "Economics of Payment Cards: A Status Report," DNB Working Papers 193, Netherlands Central Bank, Research Department.
  4. Beijnen, Christine & Bolt, Wilko, 2009. "Size matters: Economies of scale in European payments processing," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 203-210, February.
  5. Iftekhar Hasan & Heiko Schmiedel & Liang Song, 2012. "Returns to Retail Banking and Payments," Journal of Financial Services Research, Springer, vol. 41(3), pages 163-195, June.
  6. Richard Schmalensee, 2001. "Payment Systems and Interchange Fees," NBER Working Papers 8256, National Bureau of Economic Research, Inc.
  7. Chakravorti Sujit & Roson Roberto, 2006. "Platform Competition in Two-Sided Markets: The Case of Payment Networks," Review of Network Economics, De Gruyter, vol. 5(1), pages 1-25, March.
  8. Bolt Wilko & Humphrey David, 2007. "Payment Network Scale Economies, SEPA, and Cash Replacement," Review of Network Economics, De Gruyter, vol. 6(4), pages 1-21, December.
  9. Wilko Bolt & Sujit Chakravorti, 2008. "Consumer Choice and Merchant Acceptance of Payment Media," DNB Working Papers 197, Netherlands Central Bank, Research Department.
  10. Fernando E. Alvarez & Francesco Lippi, 2007. "Financial Innovation and the Transactions Demand for Cash," NBER Working Papers 13416, National Bureau of Economic Research, Inc.
  11. Heiko Schmiedel, 2007. "The economic impact of the Single Euro Payments Area," Occasional Paper Series 71, European Central Bank.
  12. Guido K. Schaefer, 2008. "An Economic Analysis of the Single Euro Payments Area (SEPA)," FIW Working Paper series 011, FIW.
  13. W. Bolt, 2003. "Retail Payments in the Netherlands: some Facts and Some Theory," WO Research Memoranda (discontinued) 722, Netherlands Central Bank, Research Department.
  14. Baxter, William F, 1983. "Bank Interchange of Transactional Paper: Legal and Economic Perspectives," Journal of Law and Economics, University of Chicago Press, vol. 26(3), pages 541-88, October.
  15. Chakravorti, Sujit & To, Ted, 2007. "A theory of credit cards," International Journal of Industrial Organization, Elsevier, vol. 25(3), pages 583-595, June.
  16. repec:rje:randje:v:37:y:2006:3:p:645-667 is not listed on IDEAS
  17. Julian Wright, 2001. "The Determinants of Optimal Interchange Fees in Payment Systems," Industrial Organization 0108001, EconWPA.
  18. James McAndrews & Zhu Wang, 2006. "Microfoundations of two-sided markets: the payment card example," Payments System Research Working Paper PSR WP 06-01, Federal Reserve Bank of Kansas City.
  19. Kemppainen, Kari, 2008. "Integrating European retail payment systems: some economics of SEPA," Research Discussion Papers 22/2008, Bank of Finland.
  20. Graeme Guthrie & Julian Wright, 2003. "Competing Payment Schemes," Departmental Working Papers wp0311, National University of Singapore, Department of Economics.
  21. Wright, Julian, 2003. "Optimal card payment systems," European Economic Review, Elsevier, vol. 47(4), pages 587-612, August.
  22. Gene Amromin & Sujit Chakravorti, 2009. "Whither Loose Change? The Diminishing Demand for Small-Denomination Currency," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(2-3), pages 315-335, 03.
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